Nice way to put it. Except that the average american credit card debt is at an interest rate of 16-17%. The US is borrowing money at less than 1%.

Martin

How would this be view if instead of saying 142,710 on credit card, it is a 142,710 mortgage.

Joshua Kennon

A mortgage is a secured asset that can be satisfied in most cases by liquidating the underlying real property, wiping out the debt. A credit card is generally (though not always) an unsecured promissory arrangement backed by nothing more than the full faith and credit of the borrower who agrees to repay the loan with future cash inflows. In the case of a mortgage, if default occurs, the underlying asset can always be seized. With an unsecured debt, that is not the case. It is more appropriate to view it as a credit card, or line of credit debt, than it would be a mortgage.

In this case, the full faith and credit of the borrower, the United States, means its taxing power to take assets from its citizens. If you are American, that means YOU. Your family. Your friends. That is what is backing the debt. For most of our recent history, total net-worth-to-national-debt has floated somewhere between 5x and 6.5x. Anything below that ratio would worry me. We’re getting there now.

Here is a chart that graphs that relationship up through 2008 by the total economy and various sectors within the economy. http://upload.wikimedia.org/wikipedia/commons/e/e0/Net-worth-of-the-United-States.jpg

If you read only one thing this week please read this. Governments do not function like households. Governments issue currency to monetize peoples real productive output and efficiency gains at a stable level. Monetizing this output creates a system where money can be used as a standard unit of measure for value in society, greatly increasing transaction efficiency.

Given that, at it’s core, a government should be running a deficit in a growing economy. If that sounds counter-intuitive imagine if the government had stopped printing and releasing money at $100,000. We would be slicing pennies to purchase cars.

http://www.joshuakennon.com/ Joshua Kennon

We’ve already discussed this ad nauseum elsewhere on the site. Yes, during recessionary environments, governments must replace the collapsing money supply through the use of deficits to prevent mass deflation.

In a growing economy, however, the deficit should be limited to the per capita expansion of the domestic population base, assuming the debt-per-resident is reasonable.

Then again, it’s really not that simple; the optimal strategy for net exporting nations is very different from the one from net importers.

If you’re curious about the actual details, go through the archives and read the posts and discussions on monetary supply, trade imbalances, etc. All of that is covered. This is a model to make unfathomable numbers relatable to the average person.

Alexander Davis

I am not proposing the ideal solution, just that this article is misleading due to the fact that our government does not function like a household.

Additionally, I thought you would enjoy the read.

I apologize if my post came off the wrong way.

http://www.joshuakennon.com/ Joshua Kennon

I just re-read this and I realize how harsh my response looks in writing. I’m so sorry! I didn’t intend for it to be that way at all. It was written a few minutes after I had finished this and I had been standing for almost 4 hours, wanting nothing more than to crawl into bed.

I didn’t mean for it to sound so direct! Your point is excellent and under the Keynesian model of economics, the accurate one. I don’t disagree with you.

Alexander Davis

I should apologize aswell, re-reading my post it comes off as preachy.

I really enjoy your blog and attitude towards life. I have a rockier story but started investing when I was 12. I told my dad I would give up my allowance for shares of Microsoft in 1997. It was a good investment at the time, but I was only dabbling.

Later, I started my portfolio in Afghanistan and socked tax free money into the tax sheltered Roth IRA, how is that for a power play??. And, after reading Benjamin Graham’s intelligent investor, shifted my money into index funds. I went to college after Afghanistan to study finance and now have a great job Valuing Businesses for a consulting firm. However, I too dream of the “optional work” lifestyle and have truly identified with a lot of the concepts here on your blog. In fact it is kind of alarming as I plan to someday leave a trust that splits payments for family education and charity.

Anyway, I will continue to follow along and it was nice meeting you, even if the internet didn’t allow tone or nuance to flow through our first 2 posts, haha.

Cheers

-Alexander

DiracWinsAgain

Well it seems like there are two ways to look at it.

1) it’s more like a credit card. The debt isn’t backed by assets but by future income.

2) Our creditors think that it is backed by the assets of the US gov’t. If we stop being able to pay the Chinese are going to foreclose on the west coast.

Also interest rates won’t stay at 1% forever. We need to get our act together while they’re still low so that when they go back up we aren’t adding a trillion dollars of new debt a year at much higher rates (I know we’ll be forced to refinance some existing debt, and all of the short term debt). Spending will come back to reality, the only question is whether we do it now on our terms as much as possible, or later when we have no choice.

Joshua Kennon

“the only question is whether we do it now on our terms as much as possible, or later when we have no choice.” – Precisely. Couldn’t have said it better.

John

This is a really simplistic way of looking at a nation’s debt vs. personal debt. The two are similar in some ways but radically different in others. For example, debt is good if you’re using it to purchase something that will provide you a higher value later. In personal terms, that’s like getting a loan for a college education or a mortgage on a house. On national terms, it’s like building a high speed rail system that will increse commerce and thus incomes (and in theory taxes) between cities. Secondly, debt between nations is also good in measured amounts. It joins nations in ways that can’t easily be undone. For example, you’re significantly less likely to go to war with a country that is indebbted to you (it makes your return on investment much less likely).
So, while I’m enjoying reading a lot of what Joshua is saying in other articles, I think this one misses the mark by a wide margin. It’s not that this isn’t true on some level, but it very much misses the nature of how money works on a national level and reduces it to popular sentiment rather than an intellectually honest description.
I’m not saying a huge national debt is good, but putting it in these terms conflates personal finances with international finance which operate on a very different level.

Mitch

Could you please help me ? I have heard a great deal about the wealth (or net wealth) concentrated in the top 1%. However, I do not see any allocation of the respective Government’s outstanding debt or future liabilities (for example, public sector pensions). I would consider, perhaps incorrectly, that the financing of a Government’s balance sheet (including an estimate of those future liabilities) is perceived to be collateralised on the wealth of the nation. Present and future wealth.
If the debt is paid off through taxation of assets and income then the poor will contribute relatively little. If it is paid off through currency printing, leading to price inflation of non-discretionary goods and services, then the poor will contribute through a reduced standard of living.
Government debt and liabilities can only be distributed on an ‘ability to pay’ basis. People with no income or assets are not going to help out. The top 1% is likely to carry a significant part of this debt servicing and repayment.
Much like the banking sector debt became Government debt at extreme levels, then ultimately extreme Government debt becomes individual taxpayers debt at extreme levels (see Cyprus).
What do you believe the net wealth situation looks like once we intelligently allocate the debt and liabilities of Governments ?
Isn’t this ‘unwritten contract’, with the top 1% underwriting massive public policy expenditures on items such as education and health, the reason that nobody sees the ‘fairness’ issue as one where they are prepared to go to the barricades ?
I am not an economist so would appreciate your input. Apologies if this covered in previous material.

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In addition to the posts on this personal blog, you can read more of my investing, finance, accounting, and portfolio management articles at Investing for Beginners over at About.com, where I've written since 2001.

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